Size Matters When Investing in Gold

TORONTO, April 8, 2014 (GLOBE NEWSWIRE) -- The Central Bank of Iraq purchased 36 tonnes of gold in March 2014, worth approximately $1.5 billion. According to Iraqi bank officials, the gold buy was an effort to stabilise the exchange rate of the Iraqi dinar against the U.S. dollar.

Despite volatility in the spot price of gold, the long term macro-trend is up.

"Investing in natural resources and precious metals is attractive today because the sector is so much cheaper than it was three years ago," stated Rick Rule, the Chairman of Sprott Global Resource Investments in a recent interview published on mining.com, "Many of the stocks are trading at a 90 percent discount to their prices in 2011. For a contrarian investor, I believe that we are seeing a historic opportunity now."

There are numerous gold-focussed investment vehicles, but the biggest returns are likely to come from the early investment in a bulk gold project moving from development into production.

Ecuador Gold and Copper (TSX-V:EGX) is one of the largest of these global projects, which has not as yet been marketed aggressively to institutional buyers. EGX controls five deposits within the Condor Complex in Ecuador.

"The world wide average cost of discovery is $30-$35 per ounce," states Glenn Laing, President and CEO of EGX in an exclusive interview with Financial Press. "At our discovery cost of $2-$3 an ounce, we are doing very well. Yes, it's partly a function of the size of our deposit, but the fact is we have spent $27 million dollars in two years proving up 10.6 million ounces of gold. To achieve that you need a geological team that does not make mistakes. And that is what we have focussed on as a company. Being aggressive and not making mistakes."

On March 24, 2014 EGX announced a significantly expanded resource estimate for the Santa Barbara South and North Zones. The company's indicated and inferred gold resources in Ecuador increased 26% to 10.6 million ounces.

"We have reached a tipping point," continues Laing. "The key take-away from the Phase 2 drilling program is the magnitude of our deposit. In the last decade there have only been 22 deposits discovered greater than 5 million ounces."

Ecuador is one of the last mainly unexplored mining frontiers. With Colombia to the north, Peru to the south, the prolific Andes Mountains gold mineralization zone straddles all three countries.

The new copper indicated and inferred resources stand at 2.3 billion pounds.

Copper consumption in China is expected to increase by about 700,000 tonnes in 2014 from the previous year. According to the International Copper Study Group, the copper market had a 193,000 tonne deficit in 2013. The global refined copper market is expected to remain in deficit in 2014, likely pushing copper prices higher.

At current spot prices, EGX's indicated metal-in-the ground is worth $12 billion – 670 times the current market capitalisation of the company.

Upside like this is usually accompanied by significant political risk, but Ecuador is a mature mining jurisdiction. Ecuador's President, Rafael Correa, has a PhD in Economics from the University of Illinois. The country has strong mining ties to China.

EGX already has a joint venture with the Chinese Guangshou Group on its Chinapintza deposit. EGX retains a 30% interest in the 300 tonne-per-day gold operation while Guangshou funds the construction and development of the narrow vein, high grade deposit. Production is expected by the end of this year.

"As well as expanding the gold resource, Phase 2 drilling revealed that we have about 2.3 billion pounds of copper," stated Laing, "Not a bad kicker for secondary metal."

Laing is a former investment banker who has proven himself a savvy deal maker. Back in 2010, Laing picked up the Condor project for about $2.50/ounce in the ground: Forty times less than Kinross paid for their Ecuadorian Fruta del Norte gold asset on a per ounce basis.

The spot price of gold has climbed 10% in 2014, but is still 30% below its 2011 high of $1,895.

"There's risk in the financial system that will drive gold much higher," states Joseph Foster, manager of Van Eck International Investors Gold Fund, in a recent interview with Reuters. Foster believes that the current gold market is similar to the cyclical bear market of 1975–1976.

"Our outlook is based on the premise that there will be unintended and highly undesirable consequences of the massive printing of money by the Fed to buy debt securities," stated Foster in a January 2014 market commentary.

The Condor Gold Project is positioned to benefit from Ecuador's Delsitanisagua hydroelectric project, which will connect to Ecuador's national transmission, ensuring an affordable supply of electricity to the Condor Gold Project.

"There is great synergy with our production timeline and this hydro-electric project," confirms Laing, "The Ecuadorian government is fully committed to a massive upgrade to their hydroelectric system. The project is financed by the Chinese. And the power should come on line in 2018."

The blue sky story for EGX is likely a take-out by a larger company. Recent South American precedents include Eike Batista's 2011 $1.54 billion purchase of Ventana Gold. Ventana controls 3.5 million ounces of gold in Colombia.

High purchase prices reflect good economics of the underlying business. The Lagunas Norte Mine in Peru produced 606,000 ounces of gold in 2013 at all-in sustaining costs of $627 per ounce, generating a yearly profit of about $387 Million. Lagunas Norte has 3.75 proven and probably ounces of gold.

A Preliminary Economic Assessment (PEA) for EGX'S Santa Barbara deposit is scheduled for completion at the end of April, 2014.

"The expansion potential of the Condor project is huge," states Laing, "So far we've focussed on 5 deposits. Additional projects could be complementary to Santa Barbara, or they could be stand alone. We'll spend 2014 exploring our best targets in to prove up more resources for the Company. It is also our intention to move Los Cuyes and Soledad up the development pipeline."

Recent municipal elections in Ecuador have maintained the status quo for EGX. "The incumbent mayors and prefects in our province were re-elected," explains Laing, "so our relationships are all intact."

Between August 2012 and January 2014 EGX completed 22,051 meters of new drilling on the Condor Gold Project concessions. Ten million ounces is a lot of gold to prove up in two years. Santa Barbara is the most exciting and undervalued advanced exploration project in South America. The freakishly low exploration cost of $2-$3 an ounce underlines the quality of the gold asset.

"We anticipate large groups coming in to try to purchase the project," explains Laing, "We already have excellent Chinese partners in one of the deposits. Following the release of a Preliminary Economic Assessment (PEA) at the end of April, we anticipate intensified interest from international miners and financiers."

"The PEA will contain detailed geological and engineering data," states Laing, "That data will enable a prospective buyer to estimate the cost of extraction. Based on our discovery costs, which are about ten times lower than industry average, we expect this to be a big, profitable mine. "

EGX is currently trading at .07 with a modest market capitalisation of $15.53 million.

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